Challenge isn?t a new thing for Meleveetil Damodaran. The tall, articulate civil servant has been credited with turning around the fortunes of some of the country?s sick public sector banks and bringing a virtually written-off Unit Trust of India back from the brink of complete disaster. And in both these tasks, it would have taken all of Mr Damodaran?s financial, administrative and persuasive skills to think up solutions which would get these institutions out of the morass they were in.

On Sunday, February 1, when Mr Damodaran and his team celebrate one year of the ?new UTI?, he would have more than UTI at the back of his mind. Yes, he has succeeded in getting UTI?s huge problems ringfenced after the finance ministry carved out a new, net asset value-driven UTI from the old one, and since then, UTI Mutual Fund, the new entity, has been performing well. But even as he emerges successful from this tough job successfully, Mr Damodaran faces his newest, and equally intense, challenge: That of turning around the Industrial Development Bank of India (IDBI). As the new chairman (though interim) of IDBI, Mr Damodaran will need to do a repeat of what he did at UTI, to ensure that the country?s premier development financial institution (DFI), which currently finds itself in a spot, is back on the rails.

Consider the task ahead: The government has just cleared a major transformation for IDBI, which will see the DFI converting into a full-fledged commercial bank. But there?s a major catch. The commercial bank will be primarily involved in development finance, which is its principal mandate. This means that while IDBI will have to function like a bank in its day-to-day activities, it will also have to ensure that it fulfils the government?s mandate ? that of supporting economic growth by financing development projects, in particular, infrastructure. In a sense, this is UTI revisited for Mr Damodaran. While the government?s revival formula for UTI saw the institution bifurcated into what was then loosely called UTI-I and UTI-II, the IDBI formula is somewhat similar. In a sense, it will entail having two IDBIs in one. One, which will fulfill the development finance mandate and fund large, long-gestation infrastructure projects, and the other which will raise and deploy short-term funds as a commercial bank does. It is this two-in-one approach which will need deft handling and execution, and a careful balancing act needs to be undertaken.

In an exclusive interview with FE at the end of the last year, Mr Damodaran had conceded that the task before him was to successfully marry these two aspects ? development finance and retail banking ? to ensure IDBI was both financially secure and capable of fulfilling the mandate which had been given to it by the latest Act of Parliament. IDBI needs low-cost funds to enable it to function efficiently, but it?s not only about low cost of funds. In order to avoid a major asset-liability mismatch, the newly-formed bank will also need to access long-term funds. This is because infrastructure projects and development finance activity would typically entail long gestation periods and cannot be funded by short-term funds. The twin aspects of low-cost and long-term is what Mr Damodaran will have to balance. So, while short-term funds would be deployed in activities like retail banking, Mr Damodaran would have to scout for avenues where he can access long-term funds as well. And the retail banking activity will essentially be an enabler for the core activity of development finance and provide it a buffer by way of an additional income stream.

For long-term funds, the new IDBI will have to look at ways where there would be an element of government support for it. Not directly, but surely by way of the government standing stoutly behind it in its fund-raising effort. And it can be through tax breaks and some other incentives. Other options, like assisting a project up to a point and then exiting, will also need to be tried out. What all this means is that this unique entity, which combines in itself two diverse activities, will need to deliver on its mandate with minimum disruption. And it must also be remembered that IDBI is a listed entity, which has to deliver on shareholder value too. Running the new IDBI is going to be a bit like riding two horses at the same time. But Mr Damodaran, who is administrator of UTI-I, chairman of UTI-II and chairman of IDBI, should know that art by now!